Can Russia And OPEC Save The Oil Industry From Further Destruction? Maybe

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UAE’s Energy Minister Suhail Mohammad Al Mazroui made a comment last week about an agreement between OPEC and non-OPEC oil producers, and Brent oil prices jumped 10.98 percent to $33.36. Such is the turmoil in the oil markets at the moment that any news can move prices.

Experts agree there is a need to cut production, but disagree widely on how much of a cut is necessary, or what effect it will have. “Cutting OPEC production by 2.2 million barrels a day could see prices rising to $60-$70 a barrel in less than two weeks,” according to Mamdouh G. Salameh, an international oil economist based in London. Two weeks after news broke that Saudi Arabia and Russia were working on a deal to cut production by 5 percent, oil rallied from $28 to $36 per barrel. Still and actual agreement is all but certain as geopolitical differences between both countries are a concern. Salameh notes that the main obstacle is mistrust between Saudi Arabia and Russia. Russia says OPEC members caused the glut in the market, so it is up to them to cut production first. Russia has committed itself to match an OPEC cut by reducing its own production by 500,000 barrels a day (b/d).

Meanwhile Ahmad Al Najjar, a Cairo-based economist counters that a price hike would just bring more American shale oil in the marketplace. “With low oil prices, the cost of extracting shale oil became too expensive. The US, as an administration, is relieved with the low oil prices. It is buying oil at low prices and is keeping the shale oil in its reserves. However, it is the American companies that are hit by the low oil prices. Especially those companies that have agreements and deals with other producing countries.”

The Global Head of Commodities and Real Assets at S&P Dow Jones Indices, Jodie Gunzberg, thinks that price recovery will depend on inventory level. The current glut could take another two years to erase even with a production cut agreement between Russia and OPEC. “Though sometimes, like in the global financial crisis, the demand isn’t strong enough to help and the shortage persists, the recovery takes much longer. It is possible inventories could take double the time now to recover from the severity of the oversupply. If this is the case, it is hard to see how the oil price itself forms, for example, it is now over seven years from oil’s high in July 2008, and it still is in a downtrend, despite an interim comeback where the price doubled from February 2009 — April 2011,” she was quoted as saying.

Even if no agreement is reached between OPEC and non-OPEC countries, OPEC members or non-OPEC members themselves could agree to cut production. Still, according to Jodie Gunzberg it doesn’t matter who starts with production cuts, but if the bigger producers cut the price, recovery will be stronger. “However, it is difficult to coordinate since there is a mix of government, privately and publicly owned companies involved in oil production. Saudi Arabia is the largest OPEC oil producer, and the Americas and former Russia have the biggest non-OPEC production share,” she added.

Saudi Arabia, with 11.75 million barrels a day, produces nearly 13.24 percent of all the oil daily in the world. The US, recently overtaking Russia thanks to shale, is second with production equal to 12 percent of the total global output. Russia comes in third with about 10.3 million barrels per day, nearly 12 percent of world production. Still, Salameh believed it is mainly OPEC members that should cut their production. As the biggest producer and exporter in OPEC, Saudi Arabia should take the lead according to him. Saudi Arabia is also responsible for the largest increase in oil production within OPEC. “It is OPEC’s responsibility since its members, and not US shale oil production, caused the glut in the market by producing 2.2 million barrels per day above their agreed production ceiling of 30 million barrels per day.”

These production caps have been removed since late last year. Saudi Arabia, and by extension OPEC, are not cutting production, arguing that they are defending their market share. According to Salameh Saudi Arabia has four objectives, “The first is defending its market share against OPEC rivals like Iraq and Iran and non-OPEC rivals like Russia and shale oil. The second is pre-empting Iraq’s and Iran’s future demand for bigger production quotas within OPEC. This can only be achieved if Saudi Arabia reduced its own production to accommodate Iran & Iraq, something the Saudis refuse to do. The third objective is waging an oil war to undermine Iran’s economy in its undeclared war on Iran because of its nuclear program and its involvement in Syria. The fourth objective is to slow down if not undermine US shale oil production.”

Not everybody agrees that Saudi Arabia and OPEC should take the lead in production cuts, but think that all parties within and outside of OPEC, should cut up to three million barrels per day. “There are nearly a surplus of 3 million barrels a day in the markets, and it will be difficult to correct the situation because of the new realities on the ground. You need a huge effort to change these realities. The world is realizing now that high dependence on oil is withdrawing. Now, the biggest car companies are making electric cars. Also, the electrical power production from solar energy is becoming more and more of a moderate cost,” according to Al Najjar.

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